In a typical case in late 2002, state bank examiners believed National City Mortgage was violating the state’s Consumer Loan Act by charging extra fees on mortgages, said Kwadwo Boateng, the state’s chief bank examiner. When asked to explain the costly “discount loan fees, underwriting fees, processing fees and marketing fees,” National City Mortgage sought intervention from federal regulators, records show.

The investigation was stopped by federal decree.

At the company’s request, Julie Williams, general counsel of the federal Office of the Comptroller of the Currency, wrote National City a letter in January 2003 saying the state had no right to examine or even visit its offices. Because National City’s parent bank in Cleveland was chartered with the OCC, the federal agency pre-empted the state’s authority. National City attached Williams’ letter to a missive to the state in February 2003, asking state investigators to stay away.

And here’s the kicker. The federal agency didn’t go after the mortgage fee complaint because it had no authority to enforce state consumer protection laws, Boateng said.

Hello, regulatory capture!

Here’s The Wall Street Journal from 2007 (emphasis mine):

Federal regulators, meanwhile, have tended to focus more on the solvency of the institutions they oversee and less on individual consumer complaints. The case of Dorothy Smith, a 67-year-old from East St. Louis, Ill., illustrates how hard it was for individuals to get regulators’ help. In 2001, Ms. Smith, living on $540 a month in government benefits, was encouraged by a contractor to apply for a loan to finance home repairs. After two loan applications were rejected, a broker submitted a third showing that she had monthly income of $1,499 and was employed at a senior-citizens home though she had actually retired 10 years before, she said. The $36,000 mortgage that First Union National Bank (now part of Wachovia Corp.) approved for her required a monthly payment of $360.33 for 15 years followed by a “balloon” payment — when she would be over 80 — of $30, 981.48. Fees and closing costs came to $3,431.

When the contractor left work unfinished, Ms. Smith sought help from Land of Lincoln Legal Assistance Foundation, which complained to Illinois bank regulators. The legal aid lawyers say the loan required unreasonably high payments given Ms. Smith’s income and a balloon payment when she would be over 80 years old. The state forwarded her complaint to the OCC, First Union’s regulator, which responded in 2002: “We cannot intercede in a private party situation regarding the interpretation or enforcement of her contract … . The OCC can provide no further assistance.”

Here’s something from a great 2002 Wall Street Journal leder by Jess Bravin and Paul Beckett headlined “Friendly Watchdog: Federal Regulator Often Helps Banks Fighting Consumers —- Dependent on Lenders’ Fees, OCC Takes Their Side Against Local, State Laws —- Defending Uniform Rules.” It shows how Hawke’s OCC actively fought against holding banks to account for their deceptive lending practices, even after complaints by what I think you could fairly call a “consumer group”:

In the FleetBoston case, the OCC received hundreds of letters from customers in 2000, complaining that the federally chartered bank had increased interest rates on its credit cards after allegedly promising a “fixed” rate. In response, the OCC sent customers letters saying it couldn’t help. Federal law “recognizes banks’ ability to change the terms of credit card account agreements,” as long as the change is disclosed, the OCC said in a typical letter sent to a complaining customer on March 23, 2000. “If you wish to pursue further remedy to your complaint, we can only suggest that you contact private legal counsel regarding any additional remedies,” the OCC added.

In October 2000, several customers filed suit, seeking class-action status and accusing FleetBoston of deceptive practices under Rhode Island state law. A Rhode Island state judge in Providence ruled in April that the case could proceed. But the OCC stepped in to help FleetBoston. The OCC argued in a friend-of-the-court brief that the state law on which the suit was based doesn’t apply to FleetBoston because the OCC can take action against unfair and deceptive practices, as it did in the Providian case — although the agency hadn’t done so regarding FleetBoston.

Here’s the American Banker in 2004:

A host of predatory practices — including equity stripping, loan-flipping, and insurance packing — have become part of the consumer finance lexicon. Industry advocates and the OCC have argued that these abuses are perpetrated by nondepository lenders, not banks. But some disagree.

“That is absolutely, 100% incorrect,” said Tom Methvin, the managing shareholder of the Montgomery, Ala. class action law firm Beasley, Allen, Crow, Methvin, Portis & Miles PC. “The depositories own the finance companies that are doing it all.”

Ryan Chittum is a former Wall Street Journal reporter, and deputy editor of The Audit, CJR's business section. If you see notable business journalism, give him a heads-up at rc2538@columbia.edu. Follow him on Twitter at @ryanchittum.